Grammatico Company has just completed its third year of operations. The income statement isas follows: Sales......................................................$ 2,460,000

Question:

Grammatico Company has just completed its third year of operations. The income statement isas follows:

Sales......................................................$ 2,460,000

Less: Cost of goods sold...............................(1,410,000)

Gross profit margin....................................$ 1,050,000

Less: Selling and administrative expenses............(710,000)

Operating income.........................................$ 340,000

Less: Interest expense....................................(140,000)

Income before taxes.....................................$ 200,000

Less: Income taxes........................................(68,000)

Net income..............................................$ 132,000

Selected information from the balance sheet is as follows:

Current liabilities.....................................$1,000,000

Long-term liabilities...................................1,500,000

Total liabilities.........................................$2,500,000

Common stock.......................................$4,000,000

Retained earnings.........................................750,000

Total equity...........................................$4,750,000

Required:

1. Compute the times-interest-earned ratio.

2. Compute the debt ratio.

3. Assume that the lower quartile, median, and upperquartile values for debt and times-interest-earned ratios in Grammatico's industry areas follows:

Times-interest-earned:...................................2.4, 5.4, 16.1

Debt:.......................................................0.3, 0.8, 2.4

How does Grammatico compare with the industrial norms? Does it have too much debt?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Cornerstones of Managerial Accounting

ISBN: 978-1305103962

6th edition

Authors: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Question Posted: